whitbread/Costa

[Breelander]

A few thoughts on how the cash should be returned...

Given that the cash return will probably be about £16 to £18 per share and represents the proceeds of the sale of a substantial part of the business it should certainly be structured as a return of capital...
...A special dividend would be far more highly taxed for many private shareholders..

Up to 2016 the usual way to return capital was by a 'B' share scheme. Tax legislation has changed, now treating such capital return schemes as 'dividends'.

Higher and additional rate taxpayers who are shareholders of companies that offer special purpose share schemes, often called “B share schemes”...
...Companies use special purpose share schemes to offer shareholders the choice to receive either a dividend or to receive a similar amount through an issue of new shares that are subsequently purchased by the company or sold to a pre-arranged third party. This measure will align the tax consequences of that choice to ensure that all shareholders are taxed as if they had received a dividend.

https://assets.publishing.service.gov.u ... chemes.pdf

[Alaric]

Tax legislation has changed, now treating such capital return schemes as 'dividends'.

As far as I understand it, the rules have only changed to the extent that all shareholders have to be offered the same. So it's either a dividend, which individuals have to pay tax on if they are above the £ 2000 limit, or a capital gain, which individuals may have to pay tax on.

In this case I hold Whitbread in an ISA, so I'm indifferent. If it was a taxed account, I think having at a return of capital is preferential, given that I manage gains anyway to stay inside the CGT limits. Others will have different priorities, so there's no easy answer for the distributing company.

[scrumpyjack]

Quite correct. There is absolutely no problem with returning cash as capital. It is just that shareholders cannot have a choice. If a choice is offered, it will automatically be treated as a dividend for all shareholders.

[Lootman]

Market buybacks (probably the most common actual choice by companies, I think) fail to treat all shareholders on an equal footing in practice, being biased against small shareholders because e.g. selling 10% of a £1k holding to get one's share of the cash has very significant selling costs compared with the cash returned, while selling 10% of a £1m holding doesn't. And they may also be biased against shareholders who have less time and attention to devote to the job of doing the selling (though opinions may vary about whether devoting much time and attention to the selling actually gains anything significant, which is why I say "may"!).

Doesn't that criticism assume that I actually want and need the cash? And I ask that because no matter how actual cash is returned to you, it is a tax event, e.g. tender offer, special dividend etc.

The beauty of a market buyback, to my mind, is that it does not create a tax event, but typically will increase the value of my position, at least if done on this kind of scale.

That said, a tender with a rollover option that does not lead to a tax event might be ideal, as long as I want the target security, which may not be the case with a foreign share.

[monabri]

There was a mention on the news that some of the money would be used to pay into the pension fund.

[PinkDalek]

Tax legislation has changed, now treating such capital return schemes as 'dividends'.

As far as I understand it, the rules have only changed to the extent that all shareholders have to be offered the same. So it's either a dividend, which individuals have to pay tax on if they are above the £ 2000 limit, or a capital gain, which individuals may have to pay tax on. ...

Not quite (I don't really understand your "the rules have only changed to the extent that all shareholders have to be offered the same") and I'm sure there is a long explanation somewhere or other on these boards.

Bree's quote from HMRC contains "Companies use special purpose share schemes to offer shareholders the choice to receive either a dividend or to receive a similar amount through an issue of new shares that are subsequently purchased by the company or sold to a pre-arranged third party. This measure will align the tax consequences of that choice to ensure that all shareholders are taxed as if they had received a dividend".

So where there's a choice it'll most probably if not always be treated as a dividend and there's therefore little point in such a choice being offered.

If a (special) dividend then Income Tax applies. If a genuine capital return then CGT applies. Both subject to any available exemptions and reliefs.

[Deev8]

Ironically I have never been a Whitbread shareholder, but earlier this year I bought some Coca-Cola shares!

Dave

[Arborbridge]

If Costa really has gone ex-growth, as has been mentioned here, I can see that WTB may want to look at something else. However, from a HYPer's POV being ex growth isn't necessarily a problem - a steady dividend paying latte-cow would fit our needs just as well. So, maybe the problem is that WTB and HYP are not particularl good bedfellows.

As for Costa reaching saturation or being too expensive: I entirely don't agree. I would agree they are pushing their prices to the limit (which is what any management does) but they are not disimilar to other offerings, and even small privately owned coffee shops have similar prices but less dependable quality. On my excursions to patronise local outfits, I come away feeling disappointed about a third of the time and the shoddy product. Weak frothy coffee instead proper capuccino and dried up cakes abound. Occasionally, one does come across a little gem, which makes the search worthwhile.


Still, what's almost done, is almost done, and we just have to move on (or stay put!).


Arb.

[Bouleversee]

With the s.p up over l4% yesterday, one could say they have already returned money to investors who choose to sell. However, articles in The Times today suggest that Premier Inns and the property business are now takeover targets so maybe worth holding on. Not being a shareholder, I don't know what else that would leave them with, if anything. Funny how some companies are hell bent on taking over others while Whitbread seems to have sold off most of its businesses. I gather some of the sale proceeds will be used for paying down debt as well as topping up the pension fund.

[Lootman]

With the s.p up over l4% yesterday, one could say they have already returned money to investors who choose to sell. However, articles in The Times today suggest that Premier Inns and the property business are now takeover targets so maybe worth holding on. Not being a shareholder, I don't know what else that would leave them with, if anything. Funny how some companies are hell bent on taking over others while Whitbread seems to have sold off most of its businesses.

Whitbread owns a few restaurant chains and they typically feature in Premier Inn hotels. So I'm not sure that all of its empire can be so cleanly chopped up and sold off in the way that Costa was.

Reminds me of Grand Metropolitan in the way that company was always buying and selling hospitality assets. In the end it got taken over itself by Guinness, becoming Diageo at the same time.

Like Grand Met, I'd assume that Whitbread owns a lot of property as well.

[UncleEbenezer]

Whitbread owns a few restaurant chains and they typically feature in Premier Inn hotels. So I'm not sure that all of its empire can be so cleanly chopped up and sold off in the way that Costa was.

I used to think of those as oldfashioned, dull, uninspiring.

Then I found myself staying at Premier Inns a few times, and was favourably impressed by the food. Some decent meals, better than I'd find anywhere else in walking distance of many Premier Inn locations, and a good one holds its own even in a restaurant-rich city centre location. Though that's generalising across several brands, and not all are entirely equal.

But they still don't have the reputation and name recognition of Premier or Costa. There could be real potential to build on some of those brands. At the same time, it's good that they support Premier: it's a definite selling point compared to a competitor like Holiday Inn.

Reminds me of Grand Metropolitan in the way that company was always buying and selling hospitality assets. In the end it got taken over itself by Guinness, becoming Diageo at the same time.

Like Grand Met, I'd assume that Whitbread owns a lot of property as well.

Grand Met was before my time of taking an interest in either hotels or investments. But I don't see Whitbread "always" buying and selling. They've expanded a lot, but that's organic, often building new. Apart from that, any Big Deals since they bought Costa and sold the brewing and pubs around the turn of the century?

[Gengulphus]

Market buybacks (probably the most common actual choice by companies, I think) fail to treat all shareholders on an equal footing in practice, being biased against small shareholders because e.g. selling 10% of a £1k holding to get one's share of the cash has very significant selling costs compared with the cash returned, while selling 10% of a £1m holding doesn't. And they may also be biased against shareholders who have less time and attention to devote to the job of doing the selling (though opinions may vary about whether devoting much time and attention to the selling actually gains anything significant, which is why I say "may"!).

Doesn't that criticism assume that I actually want and need the cash? And I ask that because no matter how actual cash is returned to you, it is a tax event, e.g. tender offer, special dividend etc.

No, because it's a criticism of bias in the opportunity it offers to shareholders - a market buyback basically says to all shareholders "You have an opportunity to get a part of this cash we're distributing, but you'll have to pay to take advantage of the opportunity, with the size of the payment not being proportional to the size of the opportunity, and furthermore, we'll pay more to those shareholders who have the time, energy and skill to read the market better". One can decline that opportunity by not selling on the market, of course, but I was only criticising share buybacks for failing the "treats all shareholders on an equal footing" part of what I had said earlier in the same post - they're fine for the immediately-following "while giving them a choice as to whether they'd like to keep their money invested in the company or to have some or all of it returned for them to invest elsewhere" part. And yes, a tax event is created no matter how cash is returned to you (assuming the shares are not held in a tax shelter, of course, but I'm sure you meant that! And that applies just as much to share buybacks as to tender offers: take part (by selling on the market or accepting the offer) and you have cash returned to you and a CGT event; fail to take part and you have no cash returned to you and no CGT event.

Gengulphus

[Lootman]

it's a criticism of bias in the opportunity it offers to shareholders - a market buyback basically says to all shareholders "You have an opportunity to get a part of this cash we're distributing, but you'll have to pay to take advantage of the opportunity, with the size of the payment not being proportional to the size of the opportunity, and furthermore, we'll pay more to those shareholders who have the time, energy and skill to read the market better". One can decline that opportunity by not selling on the market, of course, but I was only criticising share buybacks for failing the "treats all shareholders on an equal footing" part of what I had said earlier in the same post - they're fine for the immediately-following "while giving them a choice as to whether they'd like to keep their money invested in the company or to have some or all of it returned for them to invest elsewhere" part. And yes, a tax event is created no matter how cash is returned to you (assuming the shares are not held in a tax shelter, of course, but I'm sure you meant that! And that applies just as much to share buybacks as to tender offers: take part (by selling on the market or accepting the offer) and you have cash returned to you and a CGT event; fail to take part and you have no cash returned to you and no CGT event.

I see what you are saying about not treating all shareholders equally although we probably disagree on how significant the disparity is. To your earlier point, yes, the commission on a sale is proportionately higher for a small holding. But if a commission is ten quid then that is the limit of your loss.

As for the big players having "the time, energy and skill to read the market better", I'd have to say the opposite might also be true. Having worked for a few of the "big players" I can say that they are often more constrained than a small investor. Partly because they have redemptions and liabilities to meet, meaning that they can be forced sellers. Partly because they have extra rules governing them and oversight committees. And partly because of the old TMF thesis that the "Wise" can get the markets wrong more than the "Fools".

In some ways these issues mirror a couple of other situations that we can find ourselves in:

1) A takeover, which is a mandatory corporate action potentially leading to an undesired tax event. In such cases I always prefer an option that does not lead to a CGT liability. And

2) A rights issue which in some ways is the opposite of a tender offer. Declining a rights issue leads to a tax event and a dilution of your position. Accepting a tender offer leads to the former whilst declining it leads to the latter.

[MDW1954]

2) A rights issue which in some ways is the opposite of a tender offer. Declining a rights issue leads to a tax event and a dilution of your position. Accepting a tender offer leads to the former whilst declining it leads to the latter.

Agreed that accepting a tender offer leads to the former. But surely declining it doesn't necessarily lead to the latter?

MDW1954

[Lootman]

2) A rights issue which in some ways is the opposite of a tender offer. Declining a rights issue leads to a tax event and a dilution of your position. Accepting a tender offer leads to the former whilst declining it leads to the latter.

Agreed that accepting a tender offer leads to the former. But surely declining it doesn't necessarily lead to the latter?

Yes, sorry, I meant to say the opposite of course - declining a tender offer does the opposite of diluting your position.

[MDW1954]

2) A rights issue which in some ways is the opposite of a tender offer. Declining a rights issue leads to a tax event and a dilution of your position. Accepting a tender offer leads to the former whilst declining it leads to the latter.

Agreed that accepting a tender offer leads to the former. But surely declining it doesn't necessarily lead to the latter?

Yes, sorry, I meant to say the opposite of course - declining a tender offer does the opposite of diluting your position.

Not if everyone else also declines -- hence my use of the word "neccessarily"!

MDW1954

[Lootman]

Agreed that accepting a tender offer leads to the former. But surely declining it doesn't necessarily lead to the latter?

Yes, sorry, I meant to say the opposite of course - declining a tender offer does the opposite of diluting your position.

Not if everyone else also declines -- hence my use of the word "necessarily"!

Which makes me wonder if tender offers are under-written in the same way as share offerings? Because clearly if everyone declines then the objective of the tender offer is not achieved.

It could be structured as an auction, I suppose.

[MDW1954]

Yes, sorry, I meant to say the opposite of course - declining a tender offer does the opposite of diluting your position.

Not if everyone else also declines -- hence my use of the word "necessarily"!

Which makes me wonder if tender offers are under-written in the same way as share offerings? Because clearly if everyone declines then the objective of the tender offer is not achieved.

It could be structured as an auction, I suppose.

I've no idea, I'm afraid. And we're drifting off-thread, so we'd better not speculate further.

MDW1954

[tjh290633]

I thought that tender offers involved shareholders tendering their shares for purchase by the company. Usually a strike price is set, based on those at which holders tender their shares and there may be a cut-off level, above which tenders will be rejected.

Compared with buy back of shares, the holder can decide whether to participate. If he does not, then he retains the original number of shares.

What sort of tender offer are you discussing?

TJH

[Gengulphus]

I thought that tender offers involved shareholders tendering their shares for purchase by the company. Usually a strike price is set, based on those at which holders tender their shares and there may be a cut-off level, above which tenders will be rejected.

Compared with buy back of shares, the holder can decide whether to participate. If he does not, then he retains the original number of shares.

What sort of tender offer are you discussing?

I've seen two types.

In the simpler type, the company sets a single price and offers shareholders the chance to tender their shares at that price. The price they set is generally slightly above the prevailing market price, enough to give shareholders an incentive to tender their shares. In the event that they get more acceptances than they want, all acceptances get scaled back. That scaling-back counteracts the arbitrage play of accepting the tender offer at the price being offered and buying on the market at the lower price being offered there (assuming you get in quick enough) because shareholders don't know exactly how many of their shares will end up being bought by the company and so cannot match their market purchase to their tender offer sale - i.e. it prevents any such manoeuvre being a pure arbitrage play because of the risk of being left with a holding that loses money because the market price drops after the tender offer is over.

In the more complex type, the company sets a list of acceptable prices, such as "multiples of 2p from 120p to 140p" and invites shareholders to tender their shares at those prices. The range is typically from somewhat below to a fair amount above the prevailing market price IIRC (though it's many years since I last encountered any type of tender offer and even longer since I last encountered this type, so IDNRC!), and the offer is resolved by working upwards through the list of prices. At each price, they determine how many acceptances there are at that price or lower, and multiply it by that price. When they first get to a price at which that product is >= the amount they want to distribute, they've found the 'strike price'. They then buy all the shares tendered by anyone below the strike price, and scale back the shares tendered by people at the strike price as needed to distribute the desired amount. All shares bought are bought at the strike price - e.g. if you tender your shares at 130p and the strike price is 132p, you'll sell all the shares you tendered for 132p each (not 130p); if the strike price is 130p, you'll sell some of the shares you tendered for 130p each; if the strike price is 128p, you won't sell any of the shares you tendered. So basically, it's a type of auction, but not the type one first thinks of where the best bids get satisfied at what they're for, then the next best ones at whet they're for, etc.

Both types often have tweaks designed to avoid people being left with ridiculously small shareholdings, but that's the essence of them.

The second type in particular can be messy to respond to, especially as you can tender different parts of your shareholding at different prices (this is essential for most nominee brokers, as they'll have single shareholdings that are the 'pooled' holdings of all their clients who have shares in the company, and they need to be able to pass their clients' varying responses on to the company in a way that will result in them all getting what they've said they want). And what nominee brokers ask for in terms of responses from their clients my or may not be simplified from that... :-( But for HYP practical purposes, there's no difficulty about responding for a non-tinkering HYPer: simply treat it like any other offer to sell your shares, i.e. don't accept at all! And for a tinkering HYPer, it's not really any more complex than any other 'to sell or not to sell' decision...

I should add that both types of tender offer do run the risk for the company of failing to distribute all the cash they want to because they don't receive enough acceptances. I've never seen that happen, which I presume means that corporate advisers are generally quite good at choosing appropriate level(s) at which to pitch a tender offer, but if it does, I presume that the company goes through with it as far as all the acceptances it did receive are concerned, distributing some of the cash it wants to in the process, and thinks again about how to distribute the rest.

Gengulphus